Spain Post Programme Surveillance European Commission Spring 2015

Source: European Commission
Type of item: Recommendation / Analysis
Date: 13/5/2015

This third post-programme surveillance report provides an assessment of Spain's economic, fiscal and financial situation following its exit from the financial assistance programme in January 2014. The report covers also the specific monitoring of policy progress by the Commission in the context of the Macroeconomic Imbalances Procedure (MIP). There is no policy conditionality under PPS.

The economic recovery strengthened further towards the end of 2014. Reforms introduced since 2012 have contributed to the improved prospects in the labour market, further easing of financial conditions and enhanced confidence.

The labour market is recovering, but it still faces structural problems. The reform momentum needs to be maintained, also ensuring full and effective implementation.

Overall, Spain is benefiting from structural reforms, fiscal consolidation and bank recapitalisation, which are increasingly reflected in financial sector stabilisation, a strong economic recovery and low sovereign risk premia. Nonetheless, significant imbalances remain.

Full and effective implementation of the reform agenda and its further strengthening are paramount to sustain the recovery, further rebalance the economy and maintain low risk premia going forward.

Assessment:

1. GROWTH AND COMPETITIVENESS

1.1 R+D and the knowledge society

- Limited progress has been made in identifying sources of financing for the new national strategy for science, technology and innovation.

- No progress has been done in setting up a new State Research Agency.

- While the 2015 national budget increases public spending on research and innovation by 4.8 %, a substantial part of the increase is earmarked to reimburse multiannual research and innovation project grants committed in previous exercises.

1.3 Enterpreneurship

- Despite considerable progress, it is still more cumbersome to start a business in Spain than in other European countries sharing similar legal systems, a fact that could translate into lower firm dynamics.

1.4 Education

- At the time of writing, measures to further rationalize spending in education in Spain's regions had been identified but they had not been published and no agreement had been reached at the Financial and Fiscal Policy Council on their adoption.

- The Law on Quality of Education (LOMCE) is being implemented gradually, starting from the school year 2014/2015. The complex implementation process requires dialogue with regions.

 

2. COMPETITION AND REGULATION

2.2 Regulation of product and service markets

- A new electricity interconnector between France and Spain has doubled the existing connection capacity. Despite a significant improvement, the achieved capacity is still far away from the minimum threshold necessary for integration of the Spanish, Portuguese and French electricity markets.

- The 2013 reform of the electricity system helped to reduce costs of the system and to increase its revenues. Provisional assessment suggests that until November 2014, still a significant deficit was recorded, but it does not include all the revenues of the system.

2.3 Red tape and business environment regulation

- The insolvency framework has been further reinforced, and reforms of the business environment gradually implemented.

- The implementation of the law on market unity progressed further, although full implementation at regional level remains a source of concern.

2.4 Professional servies

- No progress on the professional services reform.
 

3. LABOUR MARKET

3.1 Labour market regulations

- The Social Security contributions' flat rate to support indefinite employment and targeted to low wages, has benefited approximately 20% of new indefinite contracts, possibly partly due to the lack of information among employers.

- The current system of hiring incentives presents some efficiency barriers. The structure of incentives applying to different contractual forms remains complex. Moreover, doubts persist on their actual effectiveness.

3.2 Active Labour Market policies

- The implementation of measures to make active labour market policies more effective is moving ahead, although gradually.

- Measures to modernise the public employment service are going in the right direction, although slowly, also due to complexity derived by implementation at different government levels.

- The effectiveness of the measures for the support and activation of long-term unemployed will very much depend on the capacity of national and regional employment services to design and implement individualized labour market integration programmes to the beneficiaries.

- The 2015 budget has increased the investment on the modernisation of the Public Employment Service (PES). However, the unemployment challenge and the implementation of new measures such as the programme for the long-term unemployed and the youth guarantee may put a heavy strain on the PES, and additional measures to improve its capacity and effectiveness may be needed.

- Most of the 2013-16 Youth Entrepreneurship and Employment Strategy's short-term measures are already implemented; however many of the medium and long-term measures – and the first evaluation – are still pending.

- The youth guarantee is still facing some implementation challenges. While the legal framework and the registration tool are in place, the implementation of the system depends now on a close cooperation between all the involved authorities. Reaching potential beneficiaries of the system remains the main challenge. Data on registration published monthly are not encouraging.

 

4. FINANCIAL SYSTEM

4.1 Recapitalization and Restructuring

- The restructuring of the Spanish banking sector, and in particular of banks that have received state aid, is progressing well.

- Banks are adjusting their balance sheets and credit portfolios at a good pace in order to reach a balanced and sustainable business structure.

- The burden-sharing exercises have been completed.

- Solvency of banks has been further strengthened.

- As regards the required divestments of subsidiaries, banks are mostly on track although some specific sales are facing difficulties.

- The sale of public stakes in banks to private investors has made good progress, in particular by the complete sale of two banks.

- The adoption and implementation of the necessary secondary legislation on the savings bank law of 2013, which includes the requirement that banking foundations with controlling stakes in banks set up a reserve fund, is proceeding.

- Despite the further rise in stock market valuations of Spanish banks, no further privatisation of parts of Bankia has been carried out or announced.

- SAREB's challenge of divesting its significant asset portfolio while maximising value remains significant.

- SAREB has finalised the process of choosing new servicers for its loan portfolio. The new system will allow the introduction of incentives in the servicers' contracts that link the remuneration with the performance of the loan portfolio, is completed.

- The process of adopting the Circular del Banco de España has started. It is likely that the Circular will be finally approved with quite some delay after the entry into force of the Law on savings banks, adopted in December 2013.

- Spain is in the process of the legal implementation of the Bank Recovery and Resolution Directive (BRRD), establishing a framework for the recovery and resolution of credit institutions and investment firms.

4.2 Other financial measures

- While the new personal insolvency regime is open for microenterprises and should help reduce the debt overhang of many heavily indebted households, its scope of application is limited by exclusion of public and secured creditors, and also by some necessary filters included in the system.

- Measures to promote bank financing brought tangible results. Besides further accelerating lending activity of ICO via commercial banks, it has helped reduce the average interest rate on new loans under EUR 1 million to NFCs to 4% as of January 2015.

- Measures to strengthen non-bank financial intermediation were further implemented.

- The venture capital market, supported by actions of the Fond-ICO Global, has experienced a considerable progress from the crisis. An annual fundraising of EUR 2-3 bn is possible for the Spanish venture capital market according to venture capital associations. While a considerable progress, this would be less than in 2007, the peak year, and in per capita terms a still lower level than in peer countries.
 

5. FISCAL POLICY AND PUBLIC ADMINISTRATION

5.2 Fiscal consolidation and fiscal reform

- In November 2014, the parliament adopted the tax reform. The reform focuses on cuts in personal income taxes (PIT) and corporate income taxes (CIT) and is not as comprehensive or ambitious as it could have been.
- The tax reform is a partially missed opportunity to simplify the system significantly, to fix its shortcomings, and to

sustainably lower labour taxation by shifting the tax burden further to indirect taxes (consumption or environmental) or recurrent property taxes. Not being revenue neutral the reform makes fiscal consolidation more difficult.

- No preventive measures were taken last year on regions at risk of non-compliance with the 2014 deficit target, despite visible deterioration in regions' budget execution.

5.3 Reform of the Public Administration

- There has been further progress in improving the efficiency of public administration.

- Implementation of the public administration reform continues, but reducing average payment periods for commercial transactions remains a challenge, especially at regional and local levels.

- The framework for public-private cooperation in recruitment services is in place, although still subject to some procedural barriers.

- Measures to remove duplicated administrative structures have presented greater implementation difficulties.

- Despite some progress in reducing average payment periods for commercial transactions, additional efforts are needed, especially at regional and local levels.

- At the time of writing, measures to reduce Spain's regions expenditures in public administration had been identified but they had not been published and no agreement had been reached at the Financial and Fiscal Policy Council on their adoption.

- Spain has done some progress in strengthening transparency of administrative decisions.

- No progress has been made in strengthening control mechanisms in particular at regional and local levels. There have been no initiatives to enhance these powers in the public procurement and urban planning areas.

- Some progress was achieved since the last PPS report in implementing adopted reforms – Oficina Judicial -  and improving interoperability between regions' electronic case management systems.

- No progress has been made to set up an independent body to contribute to the assessment of future major infrastructure projects by the end of 2014.

- As at end-December 2014, 129 of 222 public administration reform measures had already been implemented (58.1% of the total number of measures) while 61 others were at an advanced stage of implementation.

 

6. WELFARE STATE

6.1 Social security and pensions

- At the time of writing, measures to reduce Spain's regions expenditures in social spending had been identified but they had not been published and no agreement had been reached at the Financial and Fiscal Policy Council on their adoption.

6.2 Health system

- At the time of writing, measures to reduce Spain's regions expenditures in healthcare had been identified but they had not been published and no agreement had been reached at the Financial and Fiscal Policy Council on their adoption.

This document includes the following recommendations in the corresponding reform areas

This document includes the following recommendations in the corresponding reform areas

2. COMPETITION AND REGULATION

2.2. Regulation of product and service markets

- New electricity interconnection has been opened between France and Spain, although further progress is needed in this area to achieve a more efficient internal energy market.

- The 2014 electricity tariff deficit should be smaller than the deficits in previous years.

- If the corrective measures to deliver annual savings in the gas system's costs are not sufficient to close the deficit in future, automatic increases in gas tariffs shall be triggered, in line with the principle of system's financial sufficiency.

2.3. Red tape and business environment regulation

- Unfinished reforms need to be brought to completion in the market unity law.

- Smooth implementation at sub-central government level of the reform to facilitate licensing procedures for the establishment, sale and expansion of retail outlets is however needed for the amendments to deliver the expected results.

2.4. Professional services

- There are some pending key reforms, such as the reform of professional services and professional associations, which, if adopted, would benefit the whole economy. Failure to adopt the draft law on professional services and associations in the current legislature would be a missed opportunity to tackle remaining obstacles to the access to and exercise of regulated professions in Spain.

3. LABOUR MARKET

3.1 Labour Market regulations

- Spain has put in place a new measure to support indefinite employment, targeted at low wages, which can have a positive effect on employment, especially for vulnerable groups (low skilled workers and long-term unemployed) although more measures would be needed to significantly reduce duality.

4. FINANCIAL SYSTEM

4.1. Recapitalization and Restructuring

- The main challenges in the restructuring process relate to the disposal of the two remaining FROB owned banks, in particular of Bankia.

- Close monitoring of future SAREB's profitability is warranted, given that additional provisioning requirements can still be imposed on SAREB by the Bank of Spain.

- The approval and implementation of savings banks secondary legislation remains a challenge given the delays accumulated.

- In order to fully implement the Law of Savings Banks , the BdE should quickly complete the formal consultation process required to issue secondary legislation, Circular del Banco de España.

5. FISCAL POLICY AND PUBLIC ADMINISTRATION

5.3. Reform of the Public Administration

- Regional governments need to bolster the implementation of the law on market unity. The time consuming implementation of the law is ongoing. Prompt completion of the legislative adaptation processes and visible progress in the area of sectoral conferences are critical for the law to bear its expected economic impact.